Starting an S-Corporation is really very simple and is something a lot of people are doing now that the tax laws especially the new 199A deduction incentivizes it. People tell me all the time though “Aaron, I’m not a CPA, what do I know about this stuff?” and “Just tell me how to do it four eyes.”.
“OK” I say… Let me outline what you need to do to start an S-corporation:
Step One – Pre-organization Process
Pick the name of your business: Ok you’ve thought about it for some time now. Good. You’ve come up with the name you want… McDonalds. Now you need to check if there are any companies operating as McDonalds Inc. in California, using the fictitious name search and the SOS business lookup or if there are any McDonalds Inc. out there with an EIN. Search for the corporation name here:
https://businesssearch.sos.ca.gov/ <- CA Name Check
https://www.ccclerkrec.us/clerk/clerk/fictitious-business-name/ <- Fictitious Business Name
https://sa.www4.irs.gov/modiein/individual/index.jsp <- EIN Registration
o Protip: If the name is not taken, just take it. There is no way other than calling (which can take hours) to secure if a name is taken other than going through the process of registering online.
You’ve completed Step one. Hurrah.
Step Two – Organization Process
Now you need to file your paperwork with the secretary of state. What paperwork you might ask? “Articles of Incorporation”. “But Aaron, I’m not a lawyer” you might say. Fear not, these are not complicated filings. There is a stock form that California allows you to fill out and file. The link below will help you find the different forms and instructions for filing them. Send that bad boy in to the Secretary of State with the fees, register your fictitious business name and bingo: in a couple of weeks you will have the paperwork showing you have a corporation.
o Protip: What kind of business are you incorporating? Some businesses require special kinds of corporations called professional corporations. If you are offering a service, (Lawyer, Doctor, engineers, architects, accountants) you need a professional corporation.
https://www.sos.ca.gov/business-programs/business-entities/forms/ <- Corporate Articles Link
You’ve completed step two. Huzzah.
Step Three – S Election
Just because you checked the box “S-Corporation” when you were applying for your EIN does not mean you have an s-corporation. Counter intuitive, I know. “So what was that box I checked for Einstein?” you might ask. Well, I’m not entirely sure, but I think it determined the series of numbers your EIN was created from. Back to the task at hand FOCUS!
In order to have your corporation be treated as an S-Corporation you need to file the S Election. It can be made on a boring IRS form. An LLC can make this election too and is an alternate route to get to this very same place in the steps.
Unless you are doing something tricky, you should only need to fill out Part I of form 2553. Sign page 1 and fax it to the fax number in the instructions. You will receive in the mail within two weeks an acceptance of your s-election.
There are some boring questions to answer:
o Tax Year - When you year ends and starts.
o Election Date: Put in your incorporation date from your other forms
o The officer info (you)
o Your ownership info on the following page.
https://www.irs.gov/pub/irs-pdf/f2553.pdf <- IRS S-Election Form
https://www.irs.gov/pub/irs-pdf/i2553.pdf <- IRS S-Election Instructions
o Protip: Unless you want to make your life significantly more complicated, I suggest picking a calendar year.
You’ve completed step three. Groovy.
So assuming you were able to jump through the hoops, dot your I’s and cross your T’s You now have a legal entity that is completely separate from you. Its income flows through to you on one of those forms k-1 you might have heard about and you pay taxes on that income with your personal return. You will need to start paying yourself a salary when the company makes profit as you are now an employee of your new company. Cool Beans.
There is one other maintenance item that you should know about that MANY people forget.
CALIFORNIA STATEMENT OF INFORMATION –
This little bugger causes more headaches for business owners than any other. It serves no real purpose but needs to be filed within 90 days of registering your entity and need to be filed once ever two years. It basically asks for:
Business Address Information
Business Owners Information
That’s it. You have to pay the Secretary $25 dollars for filing this pie… informative document for you. Otherwise if you forget, you will have $250 of penalties due and the Secretary will suspend your entity for being naughty. Look for future articles for what the implications of being suspended are and why you don’t want that.
Aaron D Hunter CPA